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Manager Of Formerly $550 Million Hedge Fund Firm Threatened With Jail After Being Held In Contempt

The manager of a formerly $550 million hedge fund firm has been found to be in civil contempt of court for violating temporary injuction orders and threatened with jail time by a Connecticut state judge who disapproved of payments made to the hedge fund manager’s wife and country club dues.

Scott Stagg, who runs Stagg Capital out of Greenwich, Ct., has been ordered to perform 150 hours of community service by May 1, and told to produce a complete description of all his efforts to comply with the temporary injunction orders by next week. Judge John Blawie found in a 31-page ruling issued late last year that a temporary injunction “was never even given lip service, much less obeyed by [Stagg],” adding that if Stagg doesn’t comply he could be incarcerated until he has satisfied the requirements.

“The entire sorry situation could have been avoided, but it is the direct consequence of the defendant Stagg’s own literally contemptible behavior,” Blawie wrote.

The contempt order is the latest escalation in one of the most bitter and contentious business divorces among hedge fund owners that Greenwich has ever seen. Stagg and his former partner, Gary Katcher, have been locked in a four-year battle that has featured a criminal conviction amid allegations of theft and betrayal.

“While I fully believe I did nothing to warrant the contempt finding and I am appealing the court ruling, I am fully complying with the court order,” Stagg said in a statement. Howard Schiffman, Katcher’s lawyer, said in a statement that “Judge Blawie’s opinion speaks for itself. The Court held that Mr. Stagg willfully violated orders of the Court, and that there were ‘dozens of incidents of financial transfers where the defendant Stagg chose self-interest over any interest in his obligations under the court orders.’”

In 2008 a Connecticut state judge entered two temporary injunctions against Stagg to secure $7 million that Katcher has claimed in Connecticut state court is owed to him by Stagg. But Katcher has argued that Stagg “transferred and dissipated” the money “while Stagg has enjoyed a lavish lifestyle.” Stagg denied the charge, arguing that the financial transactions were ordinary living expenditures for the Stagg family that were allowed under the injunctions.

According to the court order, Stagg withdrew $2 million from his bank accounts between September 2008 and October 2010, when he closed his bank accounts. Stagg’s expenses included $52,000 to the Westchester Hills Country Club for dues, golf, and the use of the club, $75,000 for cars for him and his wife, $13,500 for two timeshares, and over $4,000 for NFL season tickets.

In October 2010, Stagg stopped earning a salary from a company owned by his hedge fund and the company started to pay $150,000 annually to Stagg’s wife, Jennifer. Judge Blawie found that Jennifer Stagg’s receipt of the same salary her husband used to receive was a mechanism to thwart Katcher since Jennifer Stagg has been a stay-at-home mom for 13 years with no college degree and no experience in the company’s prepaid, credit card business.

Judge Blawie referenced other transactions, including those involving a JPMorgan Chase bank account of an investment advisor to one of Stagg’s hedge funds. Between September 2008 and January 2010 that Chase bank account had over $6.5 million deposited into it and $6.7 million in withdrawals made or directed by Stagg, the order says. Stagg dissolved the investment advisor shortly after Katcher obtained a judgment against Stagg. Blawie also said that Stagg caused one of the hedge funds to “loan” Stagg at least $9.3 million in “untaxable transactions.”

All of this stems from the bitter separation of Stagg and Katcher, which Forbes covered in 2009. The duo started a hedge fund firm, 3V Capital Management, in 2004 that had $550 million in assets by 2007, but after some losses and investor redemptions those assets fell considerably. Katcher had hired Stagg in 2003 as an analyst at his Libertas Partners, a brokerage Katcher founded that specialized in junk and defaulted debt. In September 2007, Katcher sold his stake in the hedge fund firm to Stagg for $12 million, though Stagg only transferred $6 million. The firm was renamed Stagg Capital and Katcher went on in 2008 to sell Libertas to Knight Capital Group in a big $150 million deal.

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